How Inventory Management Can Help Improve Your Cash Flow

These four common inventory management issues may provide insight into the health of your business and reveal problem areas you can fix.

If you want to know how healthy your business is, inventory management may provide a diagnosis.

After all, if you buy too many products or supplies and don't sell or use them fast enough, you could lose money. If you don't buy enough products and you run out of everything while orders are coming in, you could also lose money.

But if you've struggled with your inventory management, you're not necessarily fated to continue on this path. I spoke to business owners about four common inventory management mistakes business owners can make. They shared their suggestions on how to address these inventory issues.

During your first year of business, you may not have a very good idea of when your busiest or slowest time of the year is. But by the second and third year, you may have a pretty good sense of when things will be hopping. Analyzing how your inventory has moved in the past may help you get a sense of how quickly or slowly it may move in the future.

"We live or die by how much cash we have tied up in unsold product," Rbibo says. "When demand is predicted to go down, we carry less inventory. When it goes up, we stock up."

2. You aren't keeping track of your inventory.

There are all sorts of scenarios that could play out if you aren't watching your inventory. You could be paying to hold onto items that haven't sold and aren't likely to sell any time soon. You may be consistently ordering too much of an item, or too little. Or maybe you're pushing a product, but you don't have of it in stock.

We live or die by how much cash we have tied up in unsold product. When demand is predicted to go down, we carry less inventory. When it goes up, we stock up.

—Leon Rbibo, president, The Pearl Source

Zondra Wilson, CEO of Hawthorne, California-based Blu Skin Care, didn't always maintain accurate inventory records. But, as she quickly learned, "keeping accurate inventory records can mean the difference between business life and death. Too much overage and you're sitting on money you could be making. Too little inventory and you have to tell customers you can't deliver what they want. You don't want to find yourself in either situation."

Wilson says she now uses Quickbooks to manage her inventory. There are a lot of other methods for keeping track of inventory, like Unleashed Software, Xero and BizSlate. Maybe you're small enough that, for now, a pad of paper and a pen will do. But having a handle on what you have in inventory may help improve your business.

3. You're buying too much product.

Buying too much of a product can happen when you're just getting started, and you don't have any inventory. After all, you want to stock up, so you can have something to sell. Arsineh Ghazarian is the co-founder and CEO of Zveil, a bridal veil design company and online retailer based out of Los Angeles that she runs with her husband.

Ghazarian says that when they first launched last December, they weren't sure how much they should be buying. "We had to make many assumptions about our inventory. [We wondered] which colors, lengths and designs will be most popular?"

During their first few months, their customers quickly answered those questions for them.

"Some things we got right, such as stocking the right amount of white veils versus ivory veils," she says. "But we missed the mark in other areas and overestimated the popularity of short veils, which meant we found ourselves having to slash prices to move inventory."

The lesson, according to Ghazarian: "Purchase and stock lower quantities of inventory in the beginning. You may not receive the same price breaks, but it gives you the opportunity to learn about your customers' purchasing behavior before you commit to a larger order."

4. Your inventory is overstuffed with impractical items.

When I say the item isn't practical, I mean that it isn't making you money. You may be proud that customers can order just about anything and everything from you, but remember: you're running a business, not a museum.

"A cardinal rule is 'Never fall in love with your inventory,'" says Bruce Sanders, a consumer psychologist, retail consultant and the author of Sell Well: What Really Moves Your Shoppers. "If it's not making you money, get rid of it, even if you charge less than what you paid the supplier. You'll free up shelf, rack or web page space to display items with more promise to be profitable, and at least you'll get some revenue. Actually, even if you have to give it away or trash it and get no revenue, lose the love for the lemons."

At the same time, Sanders advises that you can be too merciless, which may hurt your customers and yourself. "There are certain situations in which items in inventory do make you money even when they don't sell often," he says.

It may be the case, he says, that "the buy-it-once-in-a-lifetime fasteners are on the shelf because your store is known for carrying [those] fasteners."

Whatever the case may be, it may not hurt to take inventory management into consideration and address any issues you see in your company's own inventory.